This blog is designed to record the investment journey of a UK based small investor. I hope to make a modest contribution to the collective wealth of investing knowledge made freely available to ordinary people. I am the author of four books [see sidebar and books tab]

Saturday, 26 December 2015

Its been another quite unpredictable year in retrospect. The FTSE rose to new highs above 7,000 in April and just as quickly, got a nose bleed and dived back to more familiar territory.

Writing my blog records my personal journey as I try to navigate the ups and downs of the investing cycles. It helps me to focus, as well as holds me to account for the decisions I take. Sometimes I get it right and sometimes….well, you wonder if I have been investing for 25 days not 25 years!

This year, my main focus has been to move towards more simplicity, more diversity and less volatility.

2. Vanguard LifeStrategy - A One-Stop Solution
Far and away the most viewed post this year - currently approaching 5,000 page views. Some thoughts on helping friends with a simple, no frills investment plan.

7. What Does it take to be a Successful Investor?
Ha ha, my guess is as good as yours! A few thought on what I think it may entail. As time passes, I am concluding all you probably need is VLS60 as a core and 2 or 3 investment trusts to maintain a little interest.

9. ‘Smarter Investing’- Review
I first read about Tim Hale’s book via Retirement Investing Today blog. It only took 3 yrs to get around to reading it but I was very impressed and would recommend to any would-be investor.

10. How My Strategy is Evolving
Only posted last month, it is already the second most popular with over 2,000 page views so far.
Six months in and the revised strategy is starting to bed down - not perfect, never will be but GOOD ENOUGH FOR ME!!

Just to say thanks to everyone who has followed my journey over the past year and special thanks to those who have taken the time to leave a comment.

Lets hope the coming year is a good one!

Goodbye

Finally, a sad farewell to some people who passed away in 2015 and who have touched my life for one reason or another (no particular order) -

Wednesday, 16 December 2015

I first purchased this fund earlier this year following a review of my investing strategy. The initial purchase was made in May/June and a top up in September at a lower price which helped to average down the overall purchase price per unit. It currently accounts for ~25% of my shares/collectives portfolios combined.

The VLS range of funds were used as the basis for my latest book “DIY Simple Investing”.

Vanguard have recently announced half-year results to 30th September 2015. The report covers all 5 index funds but I will pick out the relevant figures for the fund I hold which is the LifeStrategy 60 (acc) - which consists of a mix/blend of Vanguard’s stand-alone index funds - 60% equities and 40% bonds.

Over the 6 month period the fund returned a loss of -6.5% compared to the composite benchmark of -6.1%. Average annualised returns since inception of June 2011 has been 6.85% p.a.

The above percentage figures are of the whole fund combining bonds and equities. As a percentage of the equity element, the UK accounts for 25% and US is 44% - therefore a significant home bias towards UK equities.

Ongoing charges are 0.24% p.a. - the 0.10% dilution levy on the fund was scrapped from July. In addition to the fund charges, I pay a platform fee to Halifax Share Dealing of £12.50 p.a. which adds a further ~0.08% to overall charges.

Thursday, 10 December 2015

This trust is not the highest yielder but is the top UK Income Trust in terms of net asset value and share price performance over five and ten years, its returns far outstripping those of the FTSE All-Share index. A sum of £1,000 invested 10 yrs ago would now be worth £2,898 compared to a total return of £1,723 from the benchmark FTSE All Share index.

At around 2.2%, its yield is one of the lowest in the sector but its aim is capital appreciation and income combined, with a total return in excess of the FTSE All-Share. However, the trust's portfolio is constructed without reference to a stock market index.

Long standing manager Nick Train’s approach is based on that of Warren Buffett’s and involves building a concentrated portfolio of “quality” companies that have strong brands and/or powerful market franchises.

The characteristics that define a quality company for Lindsell Train are:

durability – companies that can prosper through business cycles for many years to come;

high return on equity – companies with the ability to grow earnings year-in, year-out are favoured over those with rapid short term growth, but uncertain long term prospects; and

low capital intensity/high free cash flow generation – companies that do not have to make heavy balance sheet investment to generate earnings growth.

He holds shares for the long term regardless of short-term volatility, aiming for them to double or more in value over time. This results in extremely low portfolio turnover, which saves on transaction costs. These costs over the past year amount to just £736,000 or just 0.11% of net assets. The trust's total expense ratio remains reasonable at around 0.8%.

Results

The trust has today announced results for the full year to 30th Sept 2015 (link via Investegate). Share price total return is up 11.8% compared to -2.3% return for the FTSE All Share. A 14% outperformance in the current climate is quite an achievement.

Someone send for the police!! This year, the manager purchased a new holding for the portfolio - the first in the past 4 yrs! French drinks group Remy Cointreau has been added to the portfolio

Over the past year the dividend has increased by a respectable 7.1% to 12.1p (2013 11.3p). Revenues were 13.5p (2014 12.6p) and therefore there is once again a small surplus after accounting for payments of dividends which will further bolster the dividend reserves.

3 yr chart FGT -v- FTSE All Share Index(click image to enlarge)

Commenting on his portfolio, manager Nick Train said "It was drilled into me many years ago that there should never be any slack or deadwood in an “active” investment portfolio. There should be a reason for every holding and a live, current justification for the disposition of every penny of the capital entrusted to you.

Your Company has a concentrated portfolio which we believe meets that test. Every holding is a business that meets our investment criteria. This is most simply summarised as – the business owns a brand or franchise that makes it more or less unique. We want to be convinced that it would be difficult for any competitor to replicate the assets of our investee companies; ideally at all, or failing that, not to be able to replicate them for anything like their current enterprise value. In addition, none of our holdings currently trades at a price which we regard as excessive – there is more or less upside to our valuation targets".

Over the past year I have been moving some of my investment proceeds into index funds but I think most investors will acknowledge there are always going to be a handful of managers who can consistently beat the index and it seems to me Nick Train is certainly one of them. You cannot argue with the consistent returns he has provided for shareholders over many years.

Train has recently said his ambition is to make the trust into a FTSE 100 company over the next 10 years - ambitious but good to know he is likely to be in charge over the longer term.

I am very happy to continue holding and would be very pleased to see the trust quadruple from here.

Friday, 4 December 2015

At the half way point last year revenues were up 24% at £1.022m. Pre tax profits were up by a stonking 79.9% at £304.9m (2013 £169.5m) and underlying earnings per share were up 28.9% at 128.9p (2013 100p).

Over the year, the share price has risen over 30% from £26 to reach a high of £35 in Sept. In addition the company has paid dividends of £1.80.

In 2011, Berkeley put in place a framework to deliver £13 per share to shareholders over a ten year period, as the market began to recover from the global financial crisis. The Company is now proposing to increase the 2021 target from £13.00 per share to £16.34 per share, with the remaining £12 per share to be paid in annual dividends of £2 per share over the next six years

The board have therefore declared a further interim dividend of 100p payable in January 2016 - xd 18th December and propose to deliver a further 100p dividend in September.

Berkeley remains ungeared with net cash of £263.1m.

Commenting on the interim results, Chairman Tony Pidgley CBE said: "Berkeley's contribution to housebuilding, job creation and the wider economy remains strong. Our contribution to UK GDP was £2.1 billion in 2015, up 40% from 2014 and the seventh consecutive year of growth. Over the last five years, Berkeley has built over 17,750 new homes and contributed a total of £1.8 billion to the Treasury through direct and wider taxation. We are now supporting 26,000 jobs in the business and our supply chain. Meanwhile, since its inception in 2011, the Berkeley Foundation has committed over £6.7 million to more than 70 charities, of which £2 million has been raised by Berkeley's staff".

2015 year to date (click to enlarge)

There can be no doubt these are once again very good figures. The results were well received by the market and by lunchtime the share price was up over 6% at £35.90. The yield is currently 5.5%.

I have sold around half my individual shares this past year but I am happy I decided to keep hold of Berkeley!

Wednesday, 18 November 2015

Edinburgh is one of oldest trusts on the market as well as one of the largest investment trusts with assets approaching £1.5bn.

It is almost 2 years since Mark Barnett took over the reins from Neil Woodford.

This trust is one of the top UK Income Trust in terms of net asset value and share price performance over five and ten years, its returns far outstripping those of the FTSE All-Share index. A sum of £1,000 invested 10 yrs ago would now be worth £2,886 compared to a total return of £1,723 from the benchmark FTSE All Share index.

10 yr chart EDIN -v- FTSE All Share Index
(click to enlarge)

The trust invests primarily in UK securities with the long term objective of achieving:

an increase of the Net Asset Value per share by more than the growth in the FTSE All-Share Index; and,

growth in dividends per share by more than the rate of UK inflation.

Although this is a UK income trust, the manager is permitted to invest up to 20% of the portfolio in overseas listed holdings. Around 15% is currently allocated including Swiss pharma, Roche and US tobacco firms Reynolds and Altria. The rest of the portfolio is comprised 50% FTSE 100, 28% FTSE 250 and a smaller allocation towards UK small caps.

Edinburgh has been one of the cornerstones of my income portfolio for several years and is held in both Sipp drawdown and ISA. Earlier in the week it published results for the half year to 30th Sept 2015 (link via investegate).

The Company's share price, including reinvested dividends, rose by 6.6% during the past 6m, compared to a fall of -7.2% (total return) for the benchmark FTSE All-Share Index.

6m chart v FTSE All Share 2015

This 13.8% out performance over just 6 months is quite an achievement. This is largely the result of being underweight in miners and banks and correspondingly overweight in tobacco, pharma, real estate and non-life insurers.

Tobacco stocks - Reynolds, Imperial, BAT and Altria - take up 4 of the top 10 holdings and together account for 19.0% of the portfolio. Maybe not one for the more ethically minded investor!

During the period, the entire holding in GlaxoSmithKline was sold, Rolls Royce was reduced and low cost airline easyJet joined the portfolio.

Dividend

The board recently announced a 4% uplift in the first quarterly dividend to 5.2p (2014 5.0p) giving a current full year dividend of 24.05p

The yield is 3.4% based on the current share price of ~700p.

Conclusion

This year I have embraced passive index funds as I believe they are more likely to generate a better return than most actively managed funds over time. That said, I fully accept there will always be some managed investments that can genuinely add value and Edinburgh appears to be one of them.

There can be little doubt that index investing works; active investing can work as evidenced by the 10 yr performance and therefore a combination of the two can work. Therefore, lets not throw the baby out with the bath water... it's not either/or but take on board index funds and keep the best of the actively managed funds/trusts.

More on this following the full year results next May, but so far, happy with progress made under the stewardship of the new manager.

Monday, 16 November 2015

Sub titled ‘How to Invest without Speculation and Sleepless Nights’ by Lars Kroijer.

It’s been a wet n windy weekend here ‘up north’ which has provided an opportunity to catch up with some reading. This book has been on my list for a while and I recently managed to get hold of a copy from my local library.

Investing Edge

The central theme of this book is to persuade the reader - the rational investor - that they are more than likely someone who does not possess an edge or advantage that will help them to outperform the financial markets. Lars argues that unless we know something that nobody else knows we do not have an advantage over the market.

The lack of such an advantage however does not mean people should avoid investing as this would mean missing out on potentially exciting long term returns from the equity markets. Embracing and understanding this absence of an edge is the key to building the rational portfolio.

Rational Portfolio

At its most basic, the rational portfolio consists of some low risk investments comprising highly rated government bonds such as those from UK, USA and Germany combined with global equities. For those who want a little more risk and complexity there is the option of adding some other global bonds and corporate bonds. These should be held via low cost index funds or ETFs in a tax efficient way.

The precise mix will be determined by the individuals appetite for risk, time horizon etc. The author provides a risk range A to F where A represents very low risk gilts and F represents high risk global equities. Medium risk would be a mix - for example C (lower medium risk) - 33% low risk gilts, 50% equities, 7% other govt. bonds and 10% corp. bonds ; or D (higher medium risk) - 75% equities, 10% other govt. bonds and 15% corp. bonds.

Make adjustments to the mix over time or as the world around changes.

Take account of other assets you have such as house, business, inheritance etc. Think about these broader assets and how they may fit with your investment strategy. If investments for example represent only 10% of assets and the 90% is highly correlated and dependent upon the same factors, then diversification of just the investment portfolio could lead to a false sense of security.

Other Asset Classes

The suggested allocation of global equities combined with bonds obviously leaves out other popular asset classes such as property, commodities and private equity. The basic advice is to avoid such areas unless you have some sort of advantage or edge. Some can be expensive for fees, others can be very illiquid, you may already have some exposure via your equities or corporate bonds.

The author is a former hedge fund manager (or should that be edge fund!) and states quite categorically that venture capital and hedge funds do not belong in the rational portfolio. Personally I have never held a hedge fund as I do not understand how they operate and also they are relatively expensive. I am quite happy to accept the authors recommendation in this area. As for leaving out some exposure to commercial property…I’m not so convinced.

Practical

The final third of the book looks at very practical concerns for the average private investor - building a long term plan which takes account of goals, risk profile, other assets etc. It covers various stages of life - early starters, mid life savers and retirement and how to look at matching risk and asset allocation through the various stages.

Some ‘rules of thumb’ to consider:

Hold you age in bonds

Don’t withdraw more than 4% of the portfolio in retirement

If you react badly to portfolio losses, reduce the equity exposure by 10% - keep doing this until you feel comfortable

Conclusion

To sum up - abandon thinking you can beat the market, evaluate your time horizon and attitude to market risk then purchase a global index tracker and a UK gilts fund, invest tax efficiently via ISA or SIPP, rebalance periodically - simples! In a nutshell, that’s just about it - simple, cheap and easy to implement.

(How about the all-in-one Vanguard LifeStrategy fund - even simpler!)

Personally, I would have liked the book to be a little more concise. The basics in the book could probably be conveyed on a couple of sides of A4 but, as usual, these type of books seem to go on a little (this one covering a total of 228 pages). I guess the authors/publishers think the readers will expect a certain length of book to justify the price..... which is probably true.

To be fair, there are potted summaries at the end of most chapters.

I have been nudged along the path towards index investing over the past year or so and several articles by the author on the Monevator blog has been influential in this. The fact that many of the central themes of the book have been covered before may be the reason I felt a tad disappointed when I came to read the actual book.

However, for those who may not have read these articles previously, the book is well worth getting hold of and it certainly confirms many of the basic points suggested by Tim Hale in ‘Smarter Investing’(recent review).

I understand the author has recently started work on a second edition of the book. For those that have read the first edition and want to provide feedback they can email - lars@kroijer.com if you are OK with the publisher sending a short survey.

Monday, 2 November 2015

As the year unfolds, I feel like I have made a little progress with my change of investing emphasis.

Looking back almost 3 yrs to early 2013 when I started this blog, it is clear there has been quite a significant move. Back then I was focussed on a portfolio of individual higher yielding UK shares combined with a ‘basket’ of investment trusts to generate the natural income I required in retirement.

Today, the individual shares are much reduced, some of the investment trusts have been sold in both ISA and SIPP drawdown and they are replaced by Vanguard index funds and ETFs.

Some of the proceeds from my UK shares were recycled into Vanguards UK Equity Income fund - same church but different pew(s) with much more diversity.

My Asia focussed investment trusts were replaced with a lower cost - around 1.0% per year reduction - Vanguard Developed Asia ETF.

The balance of the proceeds have been redirected into Vanguard LifeStrategy 60 fund - 60% globally diverse equities and 40% bonds.

Why the Move to Index Funds?

This is not a sudden ‘light bulb’ conversion - I purchased my first Legal & General All Share index fund back in 1996 - almost 20 years ago. I seem to recall the charges were 0.50% p.a. which at that time was attractive because most of the funds I read about in my weekly Investors Chronicle were charging an average of 1.75%. Of course, charges have become much more competitive and 0.50% today would be regarded as expensive - 0.10% to 0.20% would be nearer the average.

I held that index fund in my PEP for many years - it was eventually transferred to my AJ Bell ISA.

My focus over the past 7 or 8 years - certainly since the dramatic events of 2008, has involved funding my decision to take early retirement from age 55 yrs. Therefore the plan has been to generate income from my investments so that I have the option not to need to pursue further paid employment.

I seem to always have had an ability to live within my means so, whilst my lifestyle remains modest - some would say frugal - this has been possible so far.

However, since starting my blog, I have been educating myself via other blogs as well as the many contributions to the comments section.

I realised at some point that I was severely limiting my investing options by restricting my chosen investments to those that provided an adequate natural yield - say 3% minimum. This had ruled out looking at the likes of Vanguard LifeStrategy funds with a natural yield of under 1.5% for example.

I am now free to consider far more options.

I have always tried to focus on low costs and, of course, there is no lower cost strategy than index funds. I have read much more on the theory underpinning index investing whilst researching material for my latest book ‘DIY Simple Investing’. This, combined with many articles on Monevator blog - especially those by Lars Kroijer has brought me full circle.

The final piece in the jigsaw was to open up the options of selling down capital i.e. develop a strategy to sell capital from funds which do not provide a sufficiently high income.

Behaviour

This is one aspect that I have probably not paid sufficient attention to in the past. Since reading Tim Hale’s ‘Smarter Investing’ it has brought home to me that I really need to bring more discipline to my process and try to eliminate some of those irrational decisions which are detrimental to better returns.

In the past, certainly overconfidence would have been part of the problem. A part of me playing the fund manager thinking I was better than others. I probably have done OK but no better than average most of the time.

Certainly another bad habit is constantly reviewing my portfolio and following the market - not good!

Time Horizon

Now in my early 60s, I am hoping for another 20 years if I am lucky. I will receive my state pension at age 65 yrs which will certainly cover the basics of food and household bills so there will be a little less pressure on my investments.

My equity exposure in recent times has been around 60%. Tim Hale suggests 4% in equities for every year you are looking to invest. By this measure, I could possibly increase my equity allocation to 80% however more equities would mean greater volatility so I am happy to remain at 60% and gradually reduce this over the coming years.

Where I am up to now?

Well, the first thing to say is I accept there are no perfect strategies - what works for one investor possibly will not work out for another.

That said, obviously some strategies have more chance of a good outcome compared to others.

I am hoping equities will continue to provide a better return than bonds so I will continue to tilt in their favour for a while longer.

Individual shares have been interesting but they are volatile and I have not noticed any greater return to my portfolio for the additional risk so I will wind down the rest of my shares portfolio in the coming months and move the proceeds into collectives.

My managed investment trusts have provided mixed returns in recent years. Some have done very well - Nick Train’s Finsbury Income, smaller company specialist Aberforth, Bankers, City of London - others have struggled - Murray Income, Murray Intl. and Dunedin Income for example. Will the ones that have disappointed recover - will the ones that have done well stumble?

All the evidence suggests that most actively managed funds do not consistently beat the market over time - but some do!

I now accept that (mostly) markets are efficient. I also accept that investing is a zero sum game - for every winner there is a loser.

I know I can never achieve a perfect portfolio - for the time being, the emphasis will involve the continued movement towards a more simple strategy - globally diverse, low costs and an appropriate balance between equities/bonds.

I am continuing to believe in the concept of ‘good enough’.

Feel free to share any thoughts with others in the comments section below - how is your strategy evolving?

Thursday, 22 October 2015

NCYF had been a part of my SIPP portfolio for a number of years however, it was one of several investment trusts to be sold as part of my drawdown release. One reason for selecting this for a sale was that earlier this year, I added the trust to my ISA portfolio.

It invests in high-yield fixed-interest securities and has produced positive NAV total returns and increased dividends in each of the past six years. The trust has a widely diversified portfolio, including some high-yielding convertibles and equities, with useful exposure to floating-rate notes to guard against inflation.

Building on the previous years 3.1% uplift, the Company's net asset value has again seen a modest adjusted increase of 1.0% although the share price return has fallen back due to a reduction in the premium to NAV - this is always a possibility with investment trusts bought at a premium to their underlying asset value. Investment returns were muted due to Eurozone concerns and the strength of the US dollar.

Dividends have been increased to 4.31p for the full year (paid quarterly) giving a yield of around 7.3% based on the current share price of 59p. The dividend is more than covered by earnings of 4.51p per share and revenue reserves are 113.5% - the equivalent of 13 months current dividends.

As in previous years, the trust continues to trade at a premium to net assets and the management have place new shares raising £50m. This has helped to reduce the percentage of ongoing charges for the year.

The management fee of 0.8% p.a. was reduced to 0.7% per annum on total assets in excess of £200m with effect from 1st January 2015. Ongoing charges for the year have reduced to 0.95%.

With a great deal of turbulence hitting the equity markets in recent weeks, its reassuring to have the steadying effect of the fixed interest constituents in my portfolio.

Thursday, 15 October 2015

As we know, there was quite a radical shake-up of pensions announced by the Chancellor in his 2014 Budget.

These changes took effect from April 2015. I have completed the forms and converted my pension from income drawdown to flexi drawdown which basically means I am now free to take ad hoc payments from my pension for whatever sum I decide as and when needed.

Under these new freedoms, I am now able to drawdown as much or as little as required. As my pension is my main source of taxable income, I can withdraw up to £10,600 tax free this year. As I have little taxable income, it appears to be a no-brainer to siphon off some of my taxable sipp over the coming few years and reinvest in my ISA as the income in the future will be tax free.

When I reviewed my sipp earlier in the year, I was a little surprised to note how favourably the Vanguard Lifestrategy60 fund would have compared over the corresponding 3 yr period since June 2012.

At the end of my 3 yr review period in June, the average annualised returns (adjusted for platform fees of 0.20%) for the Vanguard fund have been ~10.5% p.a. Assuming I sold some of units at the end of each year to provide an equivalent income, my starting sum of £62,000 would now be worth ~£74,000 had I adopted this route to manage my sipp drawdown.

Obviously, the investment trusts have delivered a steadily rising income stream which means I do not need to touch the capital. The overall CAGR at the 3 years review point was 12.9%p.a. - without the boost from smaller companies specialist Aberforth, I suspect this figure would have been nearer to the 10% offered by the Lifestrategy 60 fund.

Portfolio Sales

This revised strategy to remove the value from my sipp up to my personal allowance each year was more or less the decision I reached following the announcement 18 months back. I have mulled over the decision in the intervening period and can see no real downside. My recent walking holiday break in Pembrokeshire gave me some quality time away to reflect on things and I came back with a settled decision to go ahead with this changes to my sipp.

The main consideration therefore was merely to decide which investments to sell.

In the end, I decided to dispose of some of the investment trusts which are duplicated in my ISA. Also, I wanted to keep the Aberforth smaller companies trust and also the more globally diversified Law Debenture trust.

I have therefore sold the following :

New City High Yield
Dunedin Income
Murray Income

As the LS index fund can provide the balance and diversity I need with lower costs and a comparable, if not better, returns than the investments sold, I have decided to stick with it moving forward rather than the investment trusts. It just seems very simple.

Although the proceeds will be withdrawn and then reinvested in the Vanguard LS outside of my sipp, for the purposes of maintaining continuity of a demonstration drawdown, I will retain the investment within the sipp. The proceeds are therefore shown to purchase 79.7 units in Vanguard LifeStrategy60 (acc).

The next drawdown decision will be next July following the anticipated redemption of my Coventry BS pibs which currently account for ~ 1/3rd of the portfolio value.

Tuesday, 13 October 2015

This past year has brought about a few changes to my investing strategy which I am hoping will dampen down some of the volatility of my investing journey.

This has involved selling some of my individual shares and replacing them with collective investments - notably Vanguard UK Equity Income fund and the more diversified Lifestrategy funds which formed the basis for my latest book ‘DIY Simple Investing’.

So far this year I have sold half of my portfolio - a dozen or so individual shares, which means 12 fewer annual reports, 24 fewer dividend receipts to monitor and less to write up for the blog - hence it has been a little quiet recently.

I have taken advantage of the lovely settled weather over the past couple of weeks to enjoy a return trip to Pembrokeshire and enjoy walking the coastal footpath - this time near to Strumble Head (just below Fishguard) - highly recommended!

Strumble Head Lighthouse

I am slowly trying to get away from my daily addiction of following the markets (it helps to overlook packing the laptop!) - easy when you are physically removed from it all in a remote cottage in Wales - less so in my familiar routine at other times!

I was reminded of the benefits of not checking on your portfolio every day when I re-read ‘Smarter Investing’ and also my article on some aspects of successful investing from July following the recent market turbulence. Nobel prize winning psychologist Daniel Kahneman found that a loss yields roughly twice the psychological effect of an equivalent-size gain ....mmmm.

The chances my portfolio of shares will be up on any particular day is around 50/50 - every other day therefore I am likely to get a double whammy - not good for my emotional equilibrium.

Interestingly, the longer the gap between reviewing my portfolio, the lower the chances of registering a loss.

So, the intention will be for me to move from my daily fix to a weekly review and from there to establish a once-per-month regime. Lets see how it goes!

With less shares to monitor combined with a much less frequent viewing of my investments I will need to find a new hobby to fill all the extra time - maybe something more physical and then the coastal walks will be a little easier!

Friday, 25 September 2015

I was watching an interesting program on BBC4 this week relating to how algorithms impact our everyday lives. Some example included the little square that comes up to identify a face on our cameras, their use in the NHS to identify suitable matching kidney donors and Google‘s pagerank.

It did not touch on investments but I was wondering to what extent they may be useful in this area.

Since the introduction of RDR in the UK, the fees charged by financial advisers has become much more transparent. Those who need advice on such things as pension planning and investments now have to pay an upfront charge to the adviser. Depending on the nature of the advice and complexity, the charges could range typically between £1,000 to £2,000+vat. Many people will be put off and will either attempt to do the job themselves on a DIY basis or may not bother at all.

Could a robo advisor replace the traditional financial adviser at a fraction of the cost and provide reliable solutions?

Robo advisors operate on the principle that markets are efficient, sufficiently so to make it extremely difficult to outperform on a consistent basis. Many of the US-based robo advisers like Wealthfront and Betterment are built around the twin proposition of Modern Portfolio Theory and low cost index investing.

Vanguard is a leading robo-advisor in the USA. It launched its personal adviser service earlier this year for those with a minimum of $50,000 to invest and charges 0.30% p.a. for the service.

I see they are now considering introducing a direct to consumer (D2C) platform in the UK which should be an interesting development and will provide an opportunity for them to offer a robo adviser service in the UK. I suspect a few IFAs may be getting a little twitchy at the prospect. But competition is good....right?

They would then compete with the likes of Hargreaves Lansdown, Fidelity, Barclays and TD Direct who between them currently take around two thirds of D2C assets.

I am no expert but it looks like algorithmic investing may provide a valuable tool to the small investor. With a reliable and robust programme, it could sift through thousands of investing permutations to come up with a range of the best options to suit the criteria required by the individual. Of course the end result can only be as good as the programme permits so the way it is set up will be the crucial element.

For example, I could stipulate that I require a portfolio offering the lowest cost with the highest total return from a global market place using a mix of 50% equities and 50% bonds combined with the lowest volatility over a period of 20 years.

It could be a tool to optimise income drawdown for a given lump sum over a given period whilst reducing volatility.

The speed at which the world is changing, I can foresee a time not too far off when the majority will be tapping in a few basic details into their computers for a ready-made lifelong investment solution... copies of ‘Smarter Investing’ will be left on the bookshelf gathering dust - or is this a bit of a fantasy?

Tuesday, 22 September 2015

I finally got hold of a copy of Tim Hale’s ‘Smarter Investing’ from my local library last week - it has been on my ‘to do’ list for the past couple of years!

The book was the inspiration for Retirement Investing Today to devise his starting plan for a low cost investment strategy and which appears to have served him well so far as he closes ever nearer to financial independence.

The original version was published in 2006 - this 3rd edition came out in late 2013 so is relatively up to date. Some things have changed - the arrival of Vanguard to the UK markets, the nature of financial advice following the introduction of RDR - some things remain much the same - investor behaviour, the uncertainty of markets etc.

The underlying thesis of the book remains - to construct a robust portfolio which can withstand whatever storms the markets suffer over both short and long term.

As I have been moving my investing strategy more towards index funds over the past year or so, I was interested to read how Hale made the argument for passive investing and the evidence drawn upon in support.

The case against managed funds

Fact - the market will always beat the average investor, professional or amateur. The market consists of all investors, the return of the average investor must be the return of the market before all costs. After costs, therefore the return for the average investor must be below the market.

Hale quotes a 20 yr study by Dalbar in 2011 which shows the average investor made a return of just 4% p.a over the period compared to the average market return of just under 10% p.a.

He suggests industry costs are excessive for managed funds, and that a good record of past performance of any individual fund offers little reassurance that its future performance will be good, bad or indifferent.

Looking for future winners over the next 20 yrs from over 2,000 UK funds is compared to looking for a needle in a haystack. Research by Bogle in 2007 covering a 35 yr period revealed that less than 1% of the 355 US equity mutual funds delivered consistent out-performance.

If so, do some do it consistently over time based on skill rather than luck?

Finally, does the average investor have a reasonable chance of identifying them in advance?

The author then proceeds to address each of these questions at some length. His conclusion - Hale is convinced the best way for investors to capture the returns is via low cost, globally diversified index funds.

Smarter Investing

For all the above reasons (and many more), the book suggests avoiding the complications generated by media advertising, stock tip columns, fund rankings and other streams of endless ‘noise’, side step stock-picking, buy/sell signals, economists and active management, all of which are mostly irrelevant and confusing for most average investors.

The strategy is then simple, calm and relaxed - it is focussed on index funds and long-term asset mix.
"This is concerned with building and holding a sensible portfolio that provides the greatest chance of success…it’s about pursuing options that increase the chances of success, avoiding the chase for returns or trying to beat the market".

Smarter Strategies

Te book goes on to cover many of the basic pointers for a successful outcome - it covers the process of deciding on asset allocation and asset mix in some detail, also practical aspects such as compounding and the need to minimise costs, the ongoing maintenance of a portfolio and importantly a section on contending with human behaviour and emotions and how we can often be our own worst enemy.

The second part of the book looks at many aspects of controlling risk as well as the practical aspect of building a portfolio.

Whilst it is important to understand and evaluate risk in its many forms, it is probably easier than managing a diy portfolio over many years as the markets gyrate and any initial enthusiasm is challenged. This is why I would place more emphasis on the early chapters, particularly understanding human behaviour and ways to minimise making poor investing decisions

Simpler Decisions for a better result

This is the sub title of the book and a message repeated throughout is to keep things simple. Don’t try to select the handful of funds that may succeed from the thousands on offer. Don’t invest in things you do not understand. Review your portfolio just once per year. Don’t get sidetracked by media hype. Don’t put all your eggs in one basket and don’t worry about the things outside of your control.

“Smarter Investors realise that investing is not about trying to be an economist, or knowing how to read a company balance sheet, or having the ability to pick and choose when to be in and out of the markets, or what stocks to buy and sell. What they do know is that their mix of assets has a good chance of delivering them a successful outcome and will not lose them too much if things don’t go as planned.”

Conclusion

For the newcomer to investing, this book is a great resource - if I were to be critical, possibly a little too long for my liking and a little repetitive in parts but that would be nit picking. Also, the cost at £19.99 is possibly a little prohibitive for some so if, like me, you can get hold of a copy at the local library, so much the better.

That said, I enjoyed the book very much and even as a seasoned investor for many years, I have taken away many points to learn from and hopefully improve my own investing process.

The essence of the book are simple and probably common sense - invest in things you understand, use simple low cost funds, globally diversified passive index will probably do a better job compared to managed funds and be aware of the many human traits and poor practices which often can sabotage the chances of a good outcome for the small investor.

Its not rocket science but I guess from time to time all investors need to be reminded of some of the basics.

A really great effort from Tim Hale and, I would say, one of the best investing books on the market for UK small investors.

Leave a comment below if you have read this book. Let other know what you think of it.

Thursday, 17 September 2015

Last week I was a little underwhelmed by the results of Murray Income investment trust. This week it’s the turn of CTY, also in the UK income sector.

City of London is one of my steady, predictable, middle-of-the-road income trusts. In my corresponding post two year ago I referred to CTY as feeling like a dependable, faithful old carthorse.

City have just announced full year results for the year to 30th June 2015 (link via Investegate). Share price total return has increased by 7.2% over the year compared to the FTSE All Share benchmark of 2.6%. Dividends have increased by 3.6% from 14.76p to currently 15.30p giving a yield of 4.0%. Reserves were bolstered by the addition of a further £3.83m. The dividend was increased for the 49th consecutive year.

2 yr chart - City of London v Murray Income
(click to enlarge)

Earnings per share rose by 9.8% to 16.84p, partly reflecting the underlying dividend growth from investments held - 7.2% - but also the rise in the US dollar compared with sterling, enhancing the sterling value of dividend payments from those UK companies which declare their dividends in US dollars. In addition, special dividends rose from £1.29m last year to £4.21m.

Ongoing charges are 0.42% and remain the lowest in the sector.

Over the year there was again a reduction in the weighting in large companies with a corresponding increase in the weighting of medium-sized companies. Large companies (FTSE 100) now account for 66% of the portfolio, medium companies 23% and overseas-listed companies 11%.

Relative to the FTSE All-Share Index, City of London benefited from being significantly underrepresented in the oil and mining sectors. The best three stocks held in the portfolio which contributed to performance were all housebuilders: Taylor Wimpey, Persimmon and Berkeley Group.
This trust is possibly the nearest proxy to a HYP portfolio often discussed on the Motley Fool discussion boards.

I first purchased CTY for my personal equity plan (PEP) in 1995 - it has served me well enough over the past two decades and it represents the largest weighting in my IT portfolio (ISA and SIPP drawdown)…and yes, it still feels like a dependable, faithful old carthorse. Total return over the past 10 years has been 9.5% p.a.

The trust has been managed by Job Curtis since 1991. This is a seriously long stretch as a fund manager and I am wondering how much longer he will carry on - maybe after 25 yrs he will decide to call it a day - who knows?

Unlike Murray Income trust and Murray International which have disappointed over the past couple of years, I am happy to continue holding CTY for the foreseeable…

Friday, 11 September 2015

Murray Income Trust has been in my basket of income focussed investments trusts for several years. It has a record of increasing annual dividends in each of the past 40 years.

It has been managed by Charles Luke and his team at Aberdeen Asset Management since 2005. It is essentially a UK income trust but like several others in this sector, the management have been gradually increasing their exposure to larger, high-quality overseas listed companies. These currently make up 16% of the portfolio and include Roche, Microsoft and Nestle.

Net asset total return is down -2.2% and share price TR - 5.7% compared to the FTSE All Share Index increase of +2.6%. The reason for the under-performance is the share price having moved from premium to trading at a discount to NAV.

The board are proposing a final dividend of 11.0p making a total of 32.0p for the full year - an increase of just 2.4% compared to the previous year (31.25p). At the current share price of around 680p, the yield is 4.7%.

The managers policy is to buy and hold for the longer term - portfolio turnover was again very modest with just two additions - fund manager Schroders and chemical company Elementis. The portfolio currently comprises 47 holdings with the overseas exposure representing 16.5% of gross assets at the year-end.

Income generation has been better this year, partly due to the fall in the value of sterling - 50% of the holdings derive their income from the US dollars or euros. The income generated was 33.1p per share which therefore just covers the dividend of 32p. The Board say they are hoping to make more progress on increasing the dividend over the coming year and the recent pull-back of sterling against the dollar should help.

"Although the short term outlook for equity returns is likely to stay difficult, we remain sanguine about the medium to long term opportunities for the companies in the portfolio. We believe that globally competitive businesses with strong balance sheets will prosper over the long term and ultimately offer the best earnings and dividend growth prospects".
Charles Luke.

I note that notwithstanding the poor performance, the management fees have increased and total expenses for the year are up from 0.70% to 0.83% - £4.29m including transaction charges. I don’t mind paying a little extra for out-performance but not for under-performance!

Overall, another disappointing performance for the year with the promise of a little more to come in the way of income next year. Combined with the poor performance by Murray International, my strategy transition towards lower cost index funds and ETFs is looking increasingly a good move. I took the opportunity to sell off part of my ISA holding earlier this year but will probably reluctantly hold on for the time being and hope for a turnaround in fortunes - at least I can take some comfort from the regular quarterly dividends whilst I wait!

Tuesday, 1 September 2015

In March I started to put into place my revised strategy in relation to my individual shares portfolio.

Having come to the conclusion that my individual shares have been the weakest link of my income strategy to-date, I have been in the process of gradually winding down the shares portfolio and redirecting investment proceeds towards my investment trusts, ETFs and also to embrace the possibility of more low cost globally diversified index funds such as Vanguard LifeStrategy.

Many were sold at the high point of the market earlier in the year and, with the exception of Plastic Capital, all had made significant gains both year to-date and also in relation to cost of purchase.

Recent Sales

Earlier in August - luckily just before the market downturn, I took the opportunity to sell three further holdings.

First of all GlaxoSmithKline - the company recently announced they intend to hold the dividend at 80p for the coming 3 years. The capital value is just about the same as in 2012. I decided I had a sufficient holding in my UK-focussed investment trusts such as Edinburgh, City of London etc - sale price 1420p.

Secondly my holding in easyJet was sold @ 1730p - the share price has been a tad too volatile for my liking.

Finally, after a decent run in recent months, I decided to take profits in Booker Group having received the final dividend and also a further return of capital. The sale price was 178p.

Purchase

The net proceeds of £5,260 have been transferred to my new ISA account with Halifax Share Dealing. Fortunately the market ‘correction’ came whilst the funds were in transit between accounts. The proceeds have now been reinvested in a further 40.43 units in Vanguard LS60 which takes the total holding to 96.13 units.

These are accumulation units and therefore no income is distributed. My plan is to sell off some of the units each year to provide ‘income’.

The shares portfolio is now looking quite different to the one at the start of 2015. The remaining shares consist of BHP Billiton, Next, Unilever, Tesco, Sky, IMI, Amec Foster, Legal & General and Berkeley Group.

I am thinking that, as and when there are further disposals, it will not really be a shares portfolio any longer. Therefore, from the start of 2016 I will possibly amalgamate this portfolio with my collectives portfolio. There is already some overlap with the Vanguard Equity Income funds and LifeStrategy funds.

Good Enough

I have held my individual shares portfolio for many years - I think a part of me wanted to play the fund manager thinking I could generate a better return than the professionals. I am happy to conclude that Mr Market is too efficient for my efforts to bear fruit.

I am slowly learning to be comfortable with ‘good enough’. I’m now more globally diversified - not perfect but for now - good enough. I am edging slowly away from the rollercoaster of individual shares and entering the relative calm waters of the 60/40 Lifestrategy option. Over the coming decade, I am thinking of a steady 5% or 6% return on average (after inflation) - that will do for me.

Wednesday, 26 August 2015

As one of the largest mining company in the world, BHP Billiton is essentially a one-stop commodity shop. However, after the demerger of South32 last year, it is now more focussed on its four most profitable areas - iron ore, coal, copper and oil.

BLT has this week announced its results for the full year to 30th June 2015 (link via Investegate). Obviously the problems in China have impacted as the demand for raw materials has sent prices of key commodities much lower. Underlying profits fell by 51% to $6.4bn (last year $13.2bn) from total revenues of $44.6bn ($56.7bn 2014).

Commenting on the results, CEO, Andrew Mackenzie, said:
"In the short term we expect ongoing economic reforms in China to contribute to periods of market volatility. And, while we remain confident in the long-term outlook for commodities demand as emerging economies continue to urbanise and industrialise, we have lowered our forecast of peak Chinese steel demand to between 935 million tonnes and 985 million tonnes in the mid 2020's. This backdrop will favour low-cost producers with economies of scale.

"Importantly, we do not require the same level of investment to grow as in the past. Improved productivity can further stretch the capacity of our existing operations to increase volumes at very low cost. For example, in Western Australia Iron Ore we can increase the capacity of our system from 254 million tonnes today to 290 million tonnes over time with minimal investment, while making more than US$20 per tonne margin at today's prices. Beyond this, we continue to reduce development costs within our project portfolio. However, we remain focused on value and will only approve projects when the time is right."

Because of the cyclical nature of the business, holders of BLT should always expect it to be a bit of a rollercoaster ride. The share price has been severely impacted in recent months and at £10 is around 50% lower than this time last year.

Dividend

To its credit, the board have stuck to their policy of maintaining a progressive dividend. The proposed final dividend is 62c making a total for the year of 124c - an increase of 2.5% on the previous year. Earning over the past year were down to 120.7c which obviously means the current dividend is not covered fully. Despite the best of intentions, the board could not keep paying out more to shareholders than it receives in earnings so a cut in the dividend cannot be ruled out in the future.

Over the past 10 years, dividends have increased from 28 cents to 124 cents - a CAGR of 16%. The annualised rate over the past 5 years has slowed to just 7.3%. At current prices, the shares are yielding ~8% which is clearly very attractive assuming the dividend can be maintained and commodity prices slowly recover over the coming few years.

Capital investment, which fell by a quarter to $11bn over the past year, is set to fall to $8.5bn over the coming year and $7bn in 2017.

The share price was up 6% yesterday at 1020p recovering from a 9% fall on Monday.

Monday, 24 August 2015

In my previous post last week, I was celebrating 2.5 yrs for my blog. During that time, the markets have mainly risen without a great deal of turbulence. They say the markets can climb a wall of worry and the crash comes out of a clear blue sky.

The dramatic falls over recent days have been more of a correction after a good run of market gains. Everyone who invests should be prepared for such events - indeed, everyone who decides to invest some of their hard-earned cash will no doubt be aware intellectually that markets can go down as well as up - it is part and parcel of the process of investing. The markets do not go up in steady straight lines but zig and zag in the most unpredictable ways.

Earlier this year the FTSE 100 reached its all-time high of over 7,100. At the time of posting it is 5,900 - a fall of ~17% in the past 4 months. However it has fallen over 10% in less than 2 weeks.

For some reason, investors get jittery when the markets fall sharply. In a recent post on the sort of combinations needed to be successful, I mentioned the possibility of making poor decisions during periods of volatility - I should know as I have made plenty in the past.

Part of this process stems from paying too much attention to scary media headlines - "World Markets in Turmoil"! or "Biggest one-day Fall for 10 years - whats going on"! combined with the fact that our portfolio losses hurt much more than the pleasure experienced from stock market gains.

There may well be many investors who may have started investing over the past year or two and will not have experienced such turbulence and volatility. They will possibly start with the best of intentions to buy and hold for the long term but are now stung by losses of 10% or 15% in just the past week and who may well be thinking of cutting losses and selling up.

The Plan

Without a sound investing plan, its easy to get blown away by volatile markets. Of course, whilst it will help to have a good plan from the beginning, no one can know how they will react emotionally to a sharp sell-off in global markets until they actually experience the raw feelings that such a climate of fear can bring about.

Perhaps now is a good time to re-evaluate the plan and to see whether it is still going to keep you in the game and get you where you want to be in 10 or 20 years time.

My personal plans and strategy have been revised earlier this year and I am so glad to have made the move away from individual shares.

I know with my shares portfolio that even in the relatively calm waters of the past couple of years, the volatility and share price movement was becoming a little too much for my personal comfort zone. This has been one of the factors which brought about a change of strategy and a move towards the diversified LifeStrategy60 index fund.

Like everyone else, I have no idea where the markets are heading next but the current sell-off does not feel anything like the turmoil of late 2008 and early 2009 - more like a sharp 10% or so correction which is likely to happen every 4 or 5 yrs.

So, it almost goes without saying that the plan or investing strategy needs to be able to accommodate the sort of volatility we are seeing at present. We are all different personalities and react to events in different ways. Some people will be able to ride out the current downturn with little problem and will possibly be looking to pick up some bargains. Others will be worrying and wondering whether their decision to invest on the stock market was such a wise move as they see the value of their portfolio decline day by day.

There is obviously no one plan or strategy offering the best solution in all situations for all investors. The markets offer the probability of a much better return than bonds or cash deposits over the longer periods. Therefore, the “best” strategy for you is the one that you can stick with in good times and bad.

Keep calm and focus on the long term goal. Short-term volatility is the price that investors pay for long-term outperformance.

Thursday, 20 August 2015

I started out with this personal finance blog in Feb 2013 - it is just 30 months old.

First of all a big thanks to everyone who visits on a regular basis. Page views seem to have increased quite a bit since the early days. Also, its good to see there are quite a few comments starting to appear which is a positive as other readers (and myself) can often learn from others so please keep them coming!

Here are a few stats -

Total page views to date - 265,450, average per month is now around 14,000 to 15,000 mark.

Most viewed article - Vanguard LifeStrategy with 3,500 so far. I was fortunate to be invited to write a guest post for Monevator following the publication of my latest book and a link in the article has boosted the views. Other popular articles are Vanguard UK Equity Income Tracker (2,200), Investing for Income part 2 (1,700), and Investing Notes to my 21 yr old Self (1,650).

The main sources of referring sites have been Retirement Investing Today, Monevator, Simple Living in Suffolk and Money Saving Expert - many thanks!

Obviously, the majority of people visiting the blog are from UK (80%), however I was a bit surprised to see how far diy investor has reached globally - USA (10%), and the remaining 10% between Germany , France, Russia, Ukraine, Spain, Netherlands, Belgium, Japan, Australia, Angola, China, Indonesia, Singapore, Serbia, Belize and New Zealand.

Development

As I say in my latest book “DIY Simple Investing”, family and friends soon change the subject when personal finance is discussed so, on a personal level, its really good to have an outlet for my ‘hobby’ of personal finance and investing and to be able to share it with what seems like an ever expanding community of like-minded people.

It is, of course, always interesting to look back at earlier posts and sometimes I am surprised at just how far my thinking has changed and developed in just two and a half years.

In the early days, I was firmly committed to generating a natural income from a mixture of individual shares, investment trusts and fixed interest securities. Over the past couple of years, I have read many interesting articles on various blogs and, as the time has passed, I have begun to embrace the low cost index philosophy. I have reviewed my former strategy and believe my process has become stronger and more balanced - as well as simpler!

There appears to be no possibility of early release for good behaviour. After 30 months I find I am still enjoying my blogging and so long as I remain positive and others keep visiting, I hope to keep things going for a while longer - although if my portfolio is reduced to a couple of Vanguard trackers, there may not be too much to write about!

Monday, 17 August 2015

I hold MYI in both my sipp drawdown and also ISA. The trust aims to provide both capital and income growth from a portfolio that is predominantly focussed on global equities.

Prior to 2013, it had outperformed its benchmark in each of the previous 11 consecutive years. According to figures from the Association of Investment Companies, £1,000 invested over the past 10 years would have produced a total return of £2,500. With one or two exceptions, the dividend has grown or been held in each of the past 40 years. Dividend growth over the past 5 years is 7.8% p.a.

If the trend continues, it is looking like the trust will not manage to outperform its benchmark for a third consecutive year. The share price total return for the 6m was down -4.1% compared to +2.0% for the benchmark - comprising 40% of the FTSE World UK Index and 60% of the FTSE World ex-UK Index.

The reasons for the underperformance are an overweight positions in Asia and Latin America. In addition there has been a reduction in the premium to NAV - which is not surprising given the underperformance, currency exchange issues and an increase in weighting to fixed income securities.

Since the end of June, the share price has seen a further tumble given its exposure to the Asia economies - the chart for the year to-date looks a little in need of some tlc!

MYI v FTSE All Share - Year to date(click to enlarge)

Whilst NAV per share has fallen over the past half year, the management charges to Aberdeen have remained almost unchanged at £3.58m (2014 £3.61m). Total charges represent 0.66% of net assets including transaction costs.

Dividend

On the dividend front, the trust has today paid a first quarterly dividend of 10.5p (2014 10.0p) and recently announced a second quarterly dividend for November of 10.5p. At the current lower share price the trust is on a yield of 5.2%,

Given the outstanding track record to 2013, a year or two underperformance is to be expected. However, when it starts to become 3 years, possibly 4... who knows when the decline will be turned around. I took the opportunity to reduce my ISA holding earlier this year. I will probably hold the remainder for the time being but certainly with much less confidence then previously.

I would be interested to hear what others think about the situation with MYI - leave a comment below if you have any thoughts.

Monday, 10 August 2015

A few years back, I retired from full time paid work. I have managed to build a modest pension pot in my SIPP and also hold various investments in my S&S ISA (previously PEP) gradually accumulated over the past 20 yrs or so. I calculated that I could just about live off my savings, sipp pension and investment income, knowing my state pension would be available from age 65 yrs.

The original strategy was to hold a mix of income generating shares, investment trusts and fixed income securities. I would draw down the natural income from these investments leaving the capital untouched. Over the past 7 years, the plan has been working out much as planned.

As around 60% of the portfolio is invested in equities, the income and dividends would hopefully increase year-on-year to provide a hedge against inflation.

So far, so good.

Revised Strategy

Earlier this year, I began the process of reviewing my investment strategy and concluded that I would make a shift away from individual shares and some managed investment trusts in favour of more index funds and ETFs. I was particularly drawn to the simplicity and balance of the Vanguard LifeStrategy option. This one-stop solution formed the central theme to my latest book ‘DIY Simple Investing’.

Some of my index funds such as Vanguard FTSE UK Equity Income, pay a reasonable income however I do not want too much exposure to the UK equity market, therefore an increasing proportion of my portfolio has been reinvested in the VLS funds which are globally diversified.

However, whereas the yield on my UK Equity Income fund is around 4%, the natural yield on the VLS fund is currently only around 1.3%. I anticipate that I will probably need to sell some of the capital each year to make up the shortfall so I have purchased the accumulation version of the fund.

I will need to take account of platform costs and fund charges which together will be ~0.30% so my actual amount withdrawn will probably be nearer to 3.7%.

It would not be viable to sell units on a monthly or quarterly basis due to the dealing costs involved - currently £12.50 per transaction with my Halifax Share Deal ISA. I therefore plan to sell down capital units from VLS just once per year. The question now to be addressed is what to do about the years when there is little or no capital growth to cover the 4% sell down or even years when there is a reduction in the capital value.

The Plan for Selling Capital

The LifeStrategy funds have been going for just over 4 years. The average total return for the VLS 60 fund since launch has been 8% p.a. so at first glance it would be easy to think it would be possible to sell down 4% of units each year to use as income.

However, the past 4 years have been reasonably positive for both equities and bonds and I am expecting the longer term average to come down to nearer 6% p.a.

Also the 8% is averaged out over the four years. Looking at each year separately, the rolling 12m returns have been:

To July 2012 3.36%

To July 2013 12.05%

To July 2014 7.98%, and

To July 2015 7.28%

Total return for the current 7m year-to-date is 2.98%

I have been viewing Vanguard's simulated asset class risk tool for the 30 yr period 1984 to 2014 and using a 60/40 equity:bond allocation. Over this longer period the average return has been 10.2%.

There have been just 5 years when returns were negative and 26 yrs when returns have been positive.

The worst single year was unsurprisingly 2008 with a loss of 18% and 3 consecutive yrs, 2000, 2001 & 2002 when total returns were zero or negative.

The plan will therefore need to be flexible enough to avoid needing to sell capital when total return for the year is flat or negative.

I will therefore maintain a cash buffer - an instant access building society account - which always holds at least the equivalent of the income I would require for at least two years - so a minimum of 8% of the VLS fund value. This should provide a sufficient buffer and enable me to draw 4% income for 2 yrs without selling units in my index fund.

During the positive years I will rebuild any shortfall in the buffer account to bring it back to the 8% min. and when this is restored I will simply sell 4% of the value of my VLS fund for income. Obviously, should there be a run of consecutive returns above 4% or 5%, I will have the option to build up the buffer account to a higher percentage, take more ‘income’ or leave the excess returns invested within the VLS fund.

I have made a note to look at the return figures at the first anniversary of my initial purchase next June.

If any readers can suggest a better way to operate this or they already use their own system, please feel free to leave a comment below.

Wednesday, 5 August 2015

L&G is a large FTSE 100 company with a market cap of around £16bn employing over 8,000 people serving 10 million customers. It is responsible for investing over £500bn worldwide with operations in USA, France, The Netherlands, Egypt, India and the Gulf. However the UK still accounts for the majority of its business.

They are the UK’s leading provider of individual life insurance as well as a market leader in group protection, annuities and workplace pensions. L&G are a top 20 global asset manager and one of Europe’s largest institutional asset managers as well as being the UK’s largest investment manager for UK pension schemes.

Legal & General has a diversified business model with ~33% of the firm’s operating profit came from UK insurance, 23% from retirement products, 23% from investment management, 13% from investing its own capital and 7% from the company’s American operations.

Results

The Company has today announced its half year results for 2015 (link via Investegate). At the half way point last August, earning and profits were up 9% and the interim dividend was hiked by 21% to 2.9p.

There has been a sharp 62% fall in the sale of annuities in the first half to £1.32bn (2014 £3.5bn). This follows radical changes to pension rules in the UK however this has failed to dent the overall group progress.

Today’s results show adjusted earnings up 15% and pre-tax profits up 18% to £750m. Unfortunately, they were unable to repeat the dividend hike of last year - the interim figure is lifted by a paltry 19% to 3.45p (2014 2.9p).

Nigel Wilson, Group Chief Executive, said:
"Legal & General continues to deliver strong organic growth in the UK and the US from both our developing and established, market leading businesses. In addition we are disposing of, or closing non-core businesses and reducing costs in real and nominal terms.

The actions that we are taking allow us to focus on our chosen markets, enable us to continue to deliver low prices and better value for our increasing customer base and deliver attractive returns for our shareholders.

This financial and strategic discipline is driving our sixth year of double digit growth in net cash, operating profit and dividends…"

Last year, LGEN adopted a policy of reducing dividend cover to 1.5x earnings - this should be achieved over the coming year so I expect the current payout to be lifted in excess of 10% and have now increased my full year dividend figure to 13.5p for 2015.

It looks like the results have been well received and at the close, the share price is up 2.7% at 271p. The shares are currently trading on a prospective P/E of 14 and yield of 4.3%. For more analysis, see today’s write up by Dividend Drive.

I am happy with my acquisition and although some individual shares have left my portfolio this past year, I feel comfortable holding for the foreseeable .

Monday, 3 August 2015

I last updated on my investment trust income portfolio at the end of 2014. Since then there have been a few changes so it’s probably time for another update.

Just to recap, in June 2012, I moved my sipp into income drawdown as I felt I could generate a better income from investing over the long term than taking an annuity. Investment trusts now generate a large percentage of my drawdown income and also, combined with more recent index funds/ETFs, a larger percentage of the income in my stocks & shares ISA.

The main objective is to generate a natural income which will hopefully rise each year to keep pace with inflation - a sort of index-linked annuity substitute.

I will use the combined average of my 3 Vanguard index funds as a benchmark for the portfolio.

The Changes to the Portfolio

As mentioned in the previous report, the portfolio income of £1,222 from 2014 was used to make a new addition of Backrock Commodities Income trust - 1,355 shares @ 89p including dealing costs. Since purchase, the share price has retreated around 20% - so not the best timing but so far, the income is much as expected!

In March I replaced the Invesco Income trust with Vanguard’s Equity Income fund.

In May I replaced Schroder Oriental and Henderson Far East ITs with Vanguard’s Asia Pacific ETF. I also took the opportunity to sell half of my holdings in three investment trusts - Murray Income, Murray International and Temple Bar. The net proceeds (after sale costs) of £3,321 were reinvested in the VLS60 fund.

In June I decided to sell the Bankers trust which has had a really good run for the past few years as I wanted to move some of my equity gains into a little more diversified holdings - I therefore added the proceeds to the Vanguard LifeStrategy 60 fund.

Although this is demonstration income portfolio, it largely mirrors my own holdings. However, whilst I withdraw most of the income from my trusts and index funds for living expenses, with this demonstration portfolio I will reinvest the income at the end of each year either into an addition investment trust - as with BRCI - or recycle the income generated into one of the existing holdings.

Performance

So, how have the various investments fared over the past few months - has the income risen - how do returns compare against my Vanguard trackers?

Most investment trusts have performed reasonably OK year-to-date, however the two Aberdeen stabled trusts - Murray Income and Murray International - have been disappointing. MYI has been one of the cornerstones of my income portfolio for several years but seems to have lost its way over the past 18m or so.

The manager, Bruce Stout has railed consistently against the state of financial markets which he believes have been distorted by 'money printing' of central banks. He has also been frustrated by the underperformance of Asia and emerging markets, where he has half of the fund invested in shares and bonds, compared to the strong performance of the US stock market, where he has just 15% allocated.

I sold down half of my holding in May so maybe now could well be good opportunity to add back to my holding - however, I would need to have faith that the manager could turn around the fortunes of the trust which I do not have at present. It is not difficult to understand why the demise of the fortunes of such investments as MYI, has been instrumental in my turning more towards index funds over the past year - they will always consistently perform in line with expectations and do exactly what it says on the tin - follow the index!

Although these two have not done so well, others such as City of London, Edinburgh, Finsbury and Aberforth have performed better and have more than compensated.

As I said earlier, my benchmark against which I will measure performance will be firstly the Vanguard All World High Income tracker. The performance of this global income ETF over the year-to-date has been fairly flat. The total return, including income is 0.1%.

My Vanguard UK Equity Income fund has provided a total return of 3.5% including the half-yearly distribution at end June.

Although only recently added to the portfolio, the year-to-date return for the VLS60 fund has been 3.0%. This now represents the largest single holding in my portfolio.

Therefore, taking an average of these three, the benchmark figure against which to assess the portfolio is 2.2%

Building on the positive returns of the past three years -

2012 +20.9%,

2013 +19.4% and

2014 + 5.0%

The value of the portfolio at the start of 2015 was £35,106 compared to the current value of £35,338 - a rise of £232. The collectives income portfolio has therefore provided a return of 0.66% over the past 7 months. With a couple of exceptions mentioned, I am reasonably happy with the portfolio performance for the year so far, particularly the predictability of income.

Income

As I absolutely depend on the income from my investments to pay the bills and put food on the table, the objective of the income portfolio is to produce a dependable and rising income. Capital appreciation is always welcome but will largely follow the ups and downs of the general stock market.

Last years dividends of £1,222 were (prematurely) reinvested in the addition of Blackrock Commodities trust. The continual reinvesting of dividends is a sure-fire way to turbo charge your investment returns over the longer term.

Income so far this year is £866 - an increase of £86 compared to the dividends paid at this point last year of £780 - a rise of 11%. The main objective of the portfolio of generating a rising income to keep pace with inflation has been more than achieved with inflation currently running at below 1.0%.

I have moved some of the portfolio into the accumulation version of Vanguard LS 60 fund so there will be no distribution of income. Instead, I will be working on a strategy to sell down some of the units and will expand on this in a separate post

At the start of the year, my target income for the year was £1,365. Whilst its always very difficult if not impossible to forecast capital returns, we are more than half way through the year and I remain fairly confident the income figure will be there or thereabouts by the end of December.